The Breakdown - Lawsuit Time! Winklevoss and Gemini Sue DCG and Barry Silbert

Episode Date: July 8, 2023

So much for amicable resolution. After publically threatening a lawsuit earlier in the week, Gemini and their co-CEO Winklevoss twins have filed a lawsuit against DCG and Barry Silbert personally around the Genesis bankruptcy and their accusations of fraud.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Saturday, July 8th, and that means it's time for the weekly recap. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review. Or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown. pod. Well, as I said yesterday, I had all these best laid plans that were completely blown out of the

water by news events that happened. Yesterday, it was, of course, all about finance, and as I was finishing that story, another shoe dropped. You will no doubt remember, earlier in the week that Cameron Winklewoss and Gemini threatened to sue Barry Silbert and his digital currency group. The open letter that they shared threw around a lot of very accusational words, including, of course, that big F-word fraud. The gist of their argument was that Barry was just playing for time and that he never intended to reach any sort of actual settlement when it came to all of Genesis's and DCG's debts, including the one that mattered most to them, the $1.2 billion owed to Gemini earn users. Now, there were a number of different reactions to this. One of them was that the audience of

this letter wasn't actually Barry but in fact earn users, whether that was to cynically shift blame away from Gemini's role in all of this, or less cynically that Cameron and Gemini just wanted to be seen as fighting for their users. Now, the second response to Cameron's open letter was actually a question. That was, if you're serious, why not just file the damn lawsuit? Now, I had said in a previous episode that the biggest reason for them not to was that it would be a pretty dramatic step that could end up with them not getting what they wanted in terms of an actual resolution. And frankly, between the time that we released that episode and this morning's events, it certainly seemed like the PR explanation had legs. For example, on July 5th,

Cameron tweeted out, Hey, Barry, I'd like to invite you to a Twitter space to discuss our best and final offer. No lawyers, no advisors, just friends. I know earn users would love to hear from you. You can be the first to tell them if you're accepting the deal. Let me know when you're free. Well, yesterday's close of business was the deadline that Gemini had given publicly for these threatened lawsuits. And while many anticipated that it would come and go without nary an action, lo and behold, there is a lawsuit, partners. At 1043 Eastern Time this morning, Cameron Winklevoss tweeted, Today, Gemini filed a lawsuit against DCG Co and Barry Silbert personally in New York court.

Barry was not only the architect and mastermind of the DCG and Genesis fraud against creditors, he was directly and personally involved in perpetrating it. The complaint tells the whole story, but let's start here. When Gemini notified Genesis, it would be terminating the Earned Program in October 2022. Barry reached out to set up a meeting to introduce Gemini to continue Earn. He did this knowing Genesis was massively insolvent. Cameron shares a screenshot from the complaint that reads, Silbert's request resulted in a lunch meeting between Cameron Winkelvoss and Silbert at a restaurant in New York City on October 22, 2022. At that lunch meeting, Silbert made numerous representations

designed to induce Gemini not to discontinue the Earn program. Silbert was aware at the time that Genesis was massively insolvent because, unbeknownst to Gemini and Genesis depositors, DCG had provided Genesis with a 10-year promissory note, rather than assuming the 3AC losses, as had been claimed. Silbert was further aware that DCG had not provided meaningful near-term liquidity to Genesis sufficient to allow Genesis to honor its obligations, again, contrary to statements made to Genesis' depositors. Silbert disclosed none of those highly material facts regarding Genesis's insolvency and lack of liquidity, even as he was urging Gemini to continue the Earn Program. Cameron continues, Barry claimed that Genesis faced only a timing issue, a lie that hid the gaping hole in Genesis's balance sheets. The complaint around this reads, Silbert represented that Genesis simply needed sufficient time to affect an orderly unwinding

of its quote-unquote complex loan book, and that any difficulty that the termination of the Gemini Earned program would cause for Genesis was merely a mismatch in the timing of Genesis's loan positions. That is, Silbert affirmatively misrepresented that Genesis faced only a short-term timing mismatch between its outstanding loans and borrowing. Cameron continues, when Three Arrow's capital collapsed in June 2022, it blew a $1.2 billion dollar hole in Genesis' balance sheet. Instead of coming clean, Genesis claimed that everything was business as usual because DCG had stepped in to absorb the losses. It's now clear that this was a carefully crafted lie. DCG didn't absorb any losses or provide real capital. Behind the scenes,

DCG wrote Genesis a sham ten-year promissory note with a measly 1% interest rate worth just a fraction of its 1.1 billion face amount. Genesis was wildly insolvent. From the complaint, Genesis had told its depositors that the 3AC losses had been, assumed or absorbed by DCG. That is, that Genesis had already been made whole for the entirety of its $1.2 billion loss. But the promissory note did no such thing, nor did the promissory note improve Genesis's immediate liquidity position. In practical terms, the promissory note was a mere paper obligation, an accounting trick designed to make it appear, as if Genesis had positive equity and was actually able to meet its obligations to its depositors without requiring

DCG to commit the financial support that would have been required to actually make Genesis whole for its losses. Cameron continues. Barry, DCG, and Genesis all conspired to create false financial reports to hide the truth from Gemini and creditors. One report pretended that this phony 10-year promissory note was a current asset, a total lie and complete misrepresentation. A falsified balance sheet pretended that the note was a receivable with a value of $1.1 billion. Another lie. Genesis's loan duration figures just pretended the promissory note didn't exist because that was the only way to hide it. They literally didn't include it in the calculations. Yet another lie. This fraud goes to the very top. Barry Silbert and other DCG executives were directly involved

in these lies, and they lied again and again to conceal the truth from Gemini and other creditors. Mark Murphy, DCG, then C.O and current president, was copied when Genesis disseminated its fake financial reports. He knew that the reports lied about DCG's financial support for Genesis. Did he bother to correct them? No. Mark Murphy directly lied when he told a creditor that DCG had absorbed the 3AC losses. The whole promissory note scheme shows that Barry and DCG were in on the fraud. Its design and execution requires full participation in cooperation from Barry, DCG, and Genesis, and only works if it's hidden from creditors. From the complaint again, the basic nature of the promissory note also demonstrates that DCG was a willing participant in the scheme to mislead.

After 3AC's collapse triggered a $1.2 billion loss for Genesis, depositors had good reason to question Genesis' liquidity and the solvency of its balance sheet. The note was, unbeknownst to depositors at the time, the basis of misrepresentations by Genesis that DCG had covered the loss. But a promissory note such as this would not be a rational response to depositors' concerns. The note did not provide any short-term liquidity, or on any reasonable statement of its actual present value on a balance sheet basis, the note represented at most a small fraction of Genesis's loss on the 3AC loan. For both DCG and Genesis, the promissory note made sense only if its existence and terms could be concealed, because doing so allowed DCG to pretend to support

Genesis without taking on the financial costs that would have been required to actually do so. Put simply, the terms of the promissory note were tailor made to allow DCG and Genesis to conspire to deceive Genesis depositors. Rapping up, Cameron says, DCG and Barry personally are direct participants in the fraud that has damaged Gemini and hundreds of thousands of earn users. This complaint is an important step in holding them accountable for what they have done. We look forward to our day in court. Now, this has only just started to hit the wires in many ways, so there isn't a ton of community response yet.

There are, however, a ton of big week jokes. Barry famous for sending very cryptic Twitter messages that say this is going to be a big week. macro CRG captured what a lot of people thought when he wrote, this is incredibly damning. F in the chat for Barry. Adam Cochran stepped in with his own offer, saying an open letter to Barry. I will bid $1 for all DCG's IP, brands, and self-issued promissory notes, including your likeness which will be used for big week meme shirts. You may still sell grayscale.

You have 24 hours to respond. So obviously, by the beginning of next week, I assume that we'll have more information on this, maybe a response from DCG and Barry. But for now, the big news is that Gemini has followed through on their threats to sue both DCG and Barry Silbert personally. Now, another big and surprising piece of news came yesterday afternoon when the New York Times reported that the home of Cracken co-founder Jesse Powell was raided by the FBI back in March. According to anonymous sources, the raid was related to a criminal investigation into claims that Powell hacked and cyberstocked a non-profit organization that he founded in 2007.

During the operation, it was reported that electronic devices were reported to have been seized, and the nonprofit, called the Verge Center for the Arts, claimed that Powell interfered with computer accounts, blocked access to emails, and improperly accessed confidential materials. In the lead-up to these alleged events, Powell had been removed from the board of the nonprofit last year, with Verge claiming that he failed to attend board meetings and violated their, quote, guiding principles. Powell's removal from the board came after the same New York Times who was doing this reporting, reported on debates on race and gender taking place within Cracken's workplace messaging system,

which had very clearly tried to paint Jesse in a negative light. Now, Jesse has not been charged with any crimes, and the dispute with Verge is now the subject of a lawsuit in the California Superior Court. Jesse is claiming that he, quote, owns and has rightful access to the email accounts and remains a board member. Meanwhile, Jesse's lawyers confirmed that he was under investigation by federal prosecutors, but that the investigation was limited to allegations from Verge. They said that Verge had, quote, provided a one-sided account,

that did not provide the government with the full picture, adding that it was, quote, in no way related to Mr. Powell's employment or his conduct in the cryptocurrency arena, and that their client, quote, did nothing wrong. A Cracken spokesperson added, the U.S. Attorney has advised us that Cracken is not part of the investigation in any way, and the investigation does not concern Jesse's affiliation with Cracken. Now, Jesse stepped down as CEO at Cracken in September, which was shortly after this dispute began. Now, for his part, Jesse seemed pretty unbothered by the reporting. He responded on Twitter to a question about his recent absence from the public discourse by explaining that Diablo 4 had just been released. What am I supposed to do, he said? Where Bear is busy crushing demons?

I don't know, man, this one was weird. It pretty much just felt like another weird, kind of weak fud hit piece against Jesse in his ongoing battle with the New York Times. Keep in mind that this is a leak about a raid that happened in March that doesn't seem to have turned up anything of note. And this is also something that has now turned into a civil case rather than a criminal case. In other words, it kind of feels like it was leaked by law enforcement because they didn't manage to find anything on Jesse rather than because there was something major there. Just a couple more quick ones before we get out of here. BlockFi's plan to emerge from bankruptcy has been opposed by, well, everyone.

FTX, 3-ROS Capital, and the SEC. The plan is said to be discussed next Thursday with parties filing oppositions ahead of that hearing. Now, on the FTX side, FTX had quote-unquote bailed out BlockFie last June with a $250 million loan. It was later revealed that the two firms were significantly entangled, with Alameda having hundreds of millions of dollars worth of loans and pledged collateral tied up with BlockFi, and in addition to that, an FTX holding company had pledged 56 million Robin Hood shares that are currently worth around a half billion dollars as collateral to BlockFi. In its objection filing, FTCS wrote, BlockFie debtors believe some bankruptcy wand can be waived to make the FTX debtors' claims

disappear, without satisfying basic procedural fairness and due process requirements. This is abuse of the plan process. Now, 3AC claimed it was owed over 220 million by BlockFi and protested that it wasn't being given a chance to contest fraud allegations, and the SEC objected on the grounds that proposed clauses to release BlockFi management from personal liability were overly vague and broad. The regulator had placed similar objections to the Voyager bankruptcy plan, which subsequently fell apart after Binance backed out of a deal to acquire and distribute assets to creditors. Finally, BlockFi's creditors had previously criticized the plan, arguing that it was a convoluted and costly way to finalize the bankruptcy and primarily focused on absolving blockfye executives

from legal liability. In their filing, they called for the court to simply order a liquidation and end the needless cost to continue legal fees. They wrote, it is time for the court to order an end to the burn and thereby end the extortion tactics. Lastly today, according to anonymous Bloomberg sources, a CFTC investigation has concluded that Celsius and its former CEO Alex Mashinsky broke U.S. regulations prior to the firm's collapse. If a majority of CFTC commissioners agree with the conclusion of the investigation, a lawsuit could be filed against Machinsky by the end of this month. Attorneys with the enforcement division reportedly determined that Celsius misled investors and should have registered with the CFTC. Now, of course, a lawsuit brought

by the New York Attorney General's office is already underway. And on top of that in February, an independent examiner appointed during the bankruptcy process found that some elements of Celsius's business resembled a Ponzi scheme and were at bare minimum misleading. As they wrote in their report, In every key respect, from how Celsius described its contract with its customers, to the risks it took with their crypto assets, how Celsius ran its business differed significantly from what Celsius told its customers. So, there we go. There is some Saturday savagery for you. The Spector of 2022 continues to haunt, although at least now it feels a little bit more in the rear view than it once did. Anyways, guys, that is going to do it for today's show. Until tomorrow, be safe and take care of each other. Peace.